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In his famous monograph, Lucas (1987) put forth an argument that the welfare gains
from reducing the volatility of aggregate consumption are negligible. Subsequent work that
revisited Lucas’ calculation continued to find only small benefits from reducing the volatility
of consumption, further reinforcing the perception that business cycles don’t matter. This
paper argues instead that fluctuations can affect welfare by affecting the growth rate of
consumption. I present an argument for why fluctuations can reduce growth starting from
a given initial consumption, which could imply substantial welfare effects as Lucas (1987)
already observed in his calculation. Empirical evidence and calibration exercises suggest
that the welfare effects are likely to be substantial, about two orders of magnitude greater
than Lucas’ original estimates.